CRISIL reduces Innoventive Industries` fair value to Rs 92

CRISIL Research's report on Innoventive Industries

Weak auto demand is expected to adversely impact Innoventive Industries which generates 35-40 percent of its sales from domestic auto sector. Various OEMs have announced production cuts owing to weak demand. The recent strike at Bajaj Auto Ltd's (Bajaj's) manufacturing plant, which constitutes nearly 20 percent of Innoventive's revenues, will further impact sales in short-term. CRISIL Research expects gradual recovery in the auto segment only in H2FY14. Further the non-auto products viz., membrane strip and oil & gas related products too are witnessing a slowdown. Though we believe that Innoventive has an innovative product profile, its ability to scale up volumes due to the current slowdown is a concern. Higher capital cost on account of its recently commissioned plant will affect its profitability. Consequently, we have revised our fundamental grade to 3/5 from 4/5.

Demand slowdown continues; recovery to be slow
The recent production cuts announced by various large OEMs, some of whom are Innoventive's clients, will impact the demand for ERW/CEW tubes manufactured by Innoventive. CRISIL Research expects the slowdown in auto segment to continue for a while and a gradual recovery is expected only in H2FY14. Further, the membrane strips business is expected to be severely affected owing to weak demand from the power sector. We expect the recovery to be slower than earlier expected. We have lowered our revenue estimates for the tubes and product division by 15.9 percent for FY14 and 23.4 percent for FY15.

Strike at Bajaj Auto's plant is a short-term concern
Innoventive's motor vehicle parts division (20 percent of total revenues) supplies products mainly to Bajaj's Chakan plant. The workers at this plant have been on strike since June 25, 2013. As per media reports, the workers' recent discussions with Bajaj's management were inconclusive. The strike will affect Innoventive's sales and subsidy benefits in short-term. We have reduced our revenue estimates for the motor vehicle parts division by 12.4 percent for FY14 and 6 percent for FY15.

Working capital change is a key monitorable
Innoventive's inventory levels rose sharply in FY13-end on account of a sharp slowdown from February 2013 onwards. We expect inventory to reduce as the company adjusts its stock levels to weak demand. Change in working capital is a key monitorable as it will impact interest costs.

Estimates and fair value revised downwards
We have lowered our revenue estimates by 13.7 percent for FY14 and 16.9 percent for FY15; net profit estimates are lowered by 37.4 percent for FY14 and 33.4 percent for FY15 on account of higher fixed costs. We have also increased the cost of equity from 18.3 percent to 19.5 percent owing to change in fundamental grade. Our fair value is reduced from Rs 140 per share to Rs 92 per share. At the current market price of Rs 45, our valuation grade is 5/5

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